RBS Rolls Out Global Big Pharma ETN

October 24, 2011

RBS rolls out a ‘big pharma’ ETN, its first departure from ‘Trendpilot’ lineup.

The Royal Bank of Scotland today rolled out a new exchange-traded note based on some of the world’s largest drug companies—its fifth ETN offering and the first to depart from the alternating exposure schemes of its “Trendpilot” ETNs.

The RBS Global Big Pharma ETN (NYSE Arca: DRGS) is based on an equal-weighted index that tracks 16 large drug companies, offering investors the potential to profit from increased use of medicines among aging populations in much of the developed world and even in China. It comes with an annual expense ratio of 0.60 percent.

However, because DRGS is an ETN as opposed to an ETF, it might give some investors pause. The concern is all the more topical given that Moody’s Investor Services recently downgraded RBS’ debt, as we wrote about in a recent blog. Moreover, the bank was bailed out in 2008 at the nadir of the financial crisis by the British government to the tune of 45 billion pounds. While RBS is hardly at risk of failing, the viability of any ETN is based on the faith and credit of its issuer, in this case RBS.

That said, the advantage of ETNs is that they have no tracking error. Unlike ETFs, ETNs are not obligated to actually own any of the underlying index components. The issuer is simply responsible for delivering to investors the returns of the underlying index.

DRGS is based on the NYSE Arca Equal Weighted Pharmaceutical Total Return Index.

Its three-largest holdings are Bristol-Myers Squibb Co., Merck & Co. Inc. and GlaxoSmithKline plc. Each has a weighting in the portfolio just above or below 6.5 percent.

The Trendpilot Lineup

The company’s four previous Trendpilot ETNs are focused on U.S. large-cap stocks, U.S. midcap stocks, gold and oil, respectively. But each of the ETNs can flip to exposure to three-month Treasury bills if the price of each of the targeted investments falls below a predetermined moving average for five consecutive trading days.

That’s a 200-day moving average in the case of the RBS US Large Cap Trendpilot ETN (NYSEArca: TRND), the RBS US MidCap Trendpilot ETN (NYSEArca: TRNM) and the RBS Gold Trendpilot ETN (NYSEArca: TBAR). But the shifting exposure scheme of the RBS Oil Trendpilot ETN (NYSEArca: TWTI) is organized around a 100-day moving average.

Investment exposure would shift away from T-bills in each of the Trendpilot ETNs if the price of the index being targeted rises above its respective moving average for five consecutive trading days.

Along with the ETNs’ alternating exposures comes an alternating price structure. In the case of the equities-focused TRND and TRNM as well as the gold-focused TBAR, the index exposure costs 1.00 percent a year, while the T-bill exposure costs 0.50 percent a year. In the case of the oil-focused TWTI, the index cost 1.10 percent a year, while the T-bill exposure costs 0.50 percent.



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